Making an all-cash offer on a home can be a wonderful, yet terrifying experience. Thinking about owning a home outright and all the perks that come along with such a scenario was really exciting for us. However, saying goodbye to all that cash -- over $140,000 of it, in our case -- as we put it toward a home was also kind of frightening and was a huge decision to make.Reasoning it out
When buying a home, either we own the home or the bank does. We make the purchase at the same price either way, but in the long run, we'd end up paying the bank significantly more (we're talking about an extra $124,000 on a 30-year fixed rate mortgage at a 5 percent interest rate and with 5 percent down) to use their money to buy the home than we would if we just bought it outright. Therefore, once we began thinking about it this way, it made putting all that cash out there just a little bit easier.
A Better Deal
We hoped that by making an all-cash offer that first off it would make our offer more attractive to the sellers should there be competition. Secondly, we hoped that such an offer would result in us getting a lower price since there would be few if any contingencies or stipulations associated with the deal. And third, such an offer resulted in a shorter closing time (two weeks) which was a benefit for the seller since it helped them avoid an extra mortgage payment.
Liquidity & Cash Flow
Another consideration of an all-cash offer was future liquidity and cashflow. $140,000 isn't exactly a drop in the bucket for our family, and such an amount is actually going to leave us very cash-strapped in the short-term. However, by doing some long-term planning and using our budget to determine income versus outflow of cash over the next six to twelve months, we've ensured that we would be able to scrape by until we could re-accumulate a better cash reserve.
Part of our long-term planning had to take into account some major factors. One of these factors was property taxes and insurance. Without a bank to escrow monthly amounts in preparation for such larger lump sum charges, we had to prepare for such costs ourselves to the tune of about $3000 a year.
The other major consideration was preparing for a baby and the associated costs that come with a new baby and that will likely reach close to $8,000. Therefore, before we went blowing all our available cash, we had to ensure that we would be left with enough money in reserve and coming in over the next several months to account for these larger future costs.
Expenses Above and Beyond
When buying a home with cash, there can be expenses above and beyond just the cost of the home itself. In our case, there were items such as moving costs ($500), the home inspection ($235), the real estate lawyer ($450), a condo move-in fee ($150), and our condo insurance ($200). Factoring these costs into the price of our home helped us get a better handle on what our total costs would be when making our all-cash offer.
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